Rain and cooler temperatures in the central west of NSW delayed this year's wheat harvest. But the weather wasn't the only reason the crop was unusual.

With Australia on the cusp of an "agtech" revolution, almost 5 per cent of national grain production, around 1.5 million metric tonnes, has been processed in recent months using new software known as AgriDigital. The cloud-based transaction platform allows grain growers, buyers and bulk handlers to manage contracts, deliveries, invoices, payments and inventory all in one place.

But AgriDigital's technological innovation goes deeper than that. In December, the AgriDigital system was connected to a private blockchain computer network, which successfully executed the world's first live settlement of a physical commodity on a blockchain.

The landmark transaction occurred after David Whillock, a grower from Whillock Pastoral, near Geurie, NSW, delivered 23 metric tonnes of wheat to Dubbo-based Fletcher International Exports, run by meat industry disrupter Roger Fletcher. The blockchain system provides fast and secure payment for the grain on delivery. Mr Whillock said this would help him to maintain cash flow and manage his business more confidently.

Blockchain, also known as "distributed ledger" or "shared ledger" technology, was one of the hottest topics in global business in 2015. In 2016, teams in companies across the economy have had their heads down to determine whether the hype will translate into reality. The technology is essentially a secured database that allows multiple, independent parties to share digital information and transact among themselves as the ledgers automatically synchronise with one another.

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Early phase

While the evolution of distributed ledgers is still in an early phase, Gilbert + Tobin says 2016 marked the morphing of the public blockchain technology which underpins the crypto currency bitcoin to a new world of private shared ledgers. The coming years will see the formation of commercial consortia seeking to "reduce transaction and record-keeping costs, streamline business operations and enable new business models", the law firm said in a November paper titled Blockchain and shared ledgers: The new age of the consortium.

William Mougayar, the author of this year's book The Business Blockchain, has identified 25 blockchain-based industry consortia around the globe – of which 22 started in 2016 and 13 are in financial services. Meanwhile, in Australia several companies at the big end of town are planning to adopt distributed ledgers internally or with their suppliers.

For example, BHP Billiton said in September it will use blockchain in its supply chain to record the movements of well-bore rock and fluid samples, allowing it to work more seamlessly with vendors. The Australian Securities Exchange will decide in 2017 whether it moves the Australian equity market's clearing and settlement systems to a distributed ledger, which would reduce administration costs for its member brokers by eradicating vast swathes of back-office reconciliation work.

Gilbert + Tobin partner Bernadette Jew and consultant George Samman say the technology will create a new age of industry consortia.
Daniel Munoz

Meanwhile, the big banks are all involved in blockchain trials, including through the global R3 consortium, which is applying distributed ledgers to trade finance and cross-border payments. Commonwealth Bank of Australia has trialled the technology on a trade financing deal with US bank Wells Fargo, while National Australia Bank and CIBC of Canada this year moved currency between themselves over Ripple's distributed ledger in near real-time, compared to the status quo where funds can take several days to be cleared.

Emma Weston, the co-founder of Full Profile, the start-up behind AgriDigital, says getting a commodity like grain from the grower to the consumer currently involves a complex web of distribution, logistics and broker relationships. This increases risks and costs as title to the commodity changes via paperwork, and payments occur at various times through the supply chain. The antiquated system puts the risk of buyer insolvency or problems with payments onto the grower.

High volumes

The Victorian Farmers Federation Grains Group estimates $50 million was lost by grain growers in the state in 2014 due to grain trade insolvencies. It's a problem that costs hundreds of millions of dollars a year nationally when losses in other states are combined with the multiplier effect of lost farmer spending in rural communities.

Victorian farmers lost $50 million in 2014 when grain buyers defaulted on purchases.
Peter Riches

The AgriDigital pilot, which concluded on December 8, used a private version of the Ethereum blockchain which was customised from the source code to increase transactional speed. The grain purchase and settlement agreements were designed as "smart contracts" which executed automatically. The pilot allowed AgriDigital to test scalability and the ability of the technology to handle high volumes of commodity processing and settlements.

As well as eliminating the counterparty risk, AgriDigital and Full Profile are considering how the technology could be used to provide grain buyers with flexible financing options. And given that distributed ledgers create an immutable record of historical ownership, there are also opportunities for tracking provenance, which promises to ameliorate the growing problem of food fraud in international export markets. But protecting growers is the initial target.

"Blockchain can tell the seller about the buyer's capacity to pay, allowing them to deliver the grain comfortable in knowledge they will be paid," says Weston, a former lawyer at the Australian Wheat Board who is now based in the Sydney fintech hub Stone & Chalk.

Operate in confidence

Many growers will remember the days of AWB and government guarantees, she says. "With this new technology, we can remove counterparty risk so that buyers and sellers can operate in confidence as they did in the past.

"In the new world, finance travels with the asset, and the asset is security for the finance."

George Samman, a consultant who worked with Gilbert + Tobin on the consortium paper, said advancements this year in distributed ledger technology mean participants can now selectively share information, as processes for making and validating transactions are kept confidential.

"Distributed ledger technology allows you to have a just-in-time inventory structure. In trade finance, you can also get privacy around what is being shipped, by only involving those who actually need to know. From a pricing perspective for commodities, it becomes attractive when you don't have to share your pricing with other people."

Blockchain aficionados will recognise the irony that the technology which initially allowed bitcoin to facilitate payments without the need for central parties to establish trust is now driving collaboration across industries seeking to adapt it for private systems.

Gilbert + Tobin partner Bernadette Jew, co-author of the paper with Samman, said as businesses chose whether to form consortia to exploit the efficiencies promised by distributed ledgers, careful thought is needed to design the governance framework.

"We are trying to focus on the new types of collaboration and new business opportunities," she says. "In the past, it has been about the technology and trailing transactions in isolation in a proof of concept. Now we need to move on and think about new ways of working together and entirely new business models."

Future opportunity

Not surprisingly, the world is paying attention on the emergence of Australian agtech. Full Profile, which won Westpac's Blockchain Hackathon this year, also presented to 2000 delegates at FinovateFall in New York in September. In 2017, it plans to export its AgriDigital technology to Canada.

Weston says future opportunity lies in connecting grain and other commodities to the internet of things. The use of sensor technology to monitor geographical location and the quality of grain will help to reduce fraud and allow new data sets to calculate more tailored financial services.

Blockchain will remain in focus for policymakers and regulators in 2017, as the CSIRO's Data61 unit continues with an inquiry on the impact of blockchain on the Australian economy. It is considering how governments might use it to manage land title, identity or licensing registers.

While industry incumbents determine their own strategies, Weston says it's important for start-ups to lead with potential models, take on risk and enable others to learn by becoming a vehicle for opening conversation.

"Agriculture has been characterised by high levels of competition and there are many entrenched players across the supply chain, including the financing of the supply chain," she says.

"We want to democratise the access to finance and bring more liquidity to the global supply chain."